This document discusses valuation methods for goodwill. It defines valuation as estimating the worth of an asset or liability by a professional. Goodwill is characterized as an intangible asset that contributes to excess profits and is only realized upon sale or transfer of a business. The key methods discussed for valuing goodwill are the average profit method, super profit method, and capitalization method. The average profit method calculates goodwill as the average profit over past years multiplied by a number of years. The super profit method separates profits into normal profits and super profits. The capitalization method values goodwill based on capital employed and normal rate of return.
2. Valuation
Valuation means an estimation of the
worth of something which is carried
out by a professional valuer.
In context of finance items that are
usually valued are financial asset
(marketable securities, patent ,
goodwill) or liability (bond issued by
company)
3. Need of valuation
For investment analysis
Capital budgeting
Merger
Acquisition transactions
Financial reporting
For determining tax liability
In litigation
5. Characteristics of goodwill
It belong to the category
of intangible asset.
It is valuable asset
contributing to excess
profit
It’s value is realised only
when a business is sold or
transferred
6. Methodof valuation of Goodwill
1) AVERAGE PROFIT
METHOD(FUTURE
MAINTAINABLE
PROFITS)
4) CAPITALISATION
METHOD
GOODWILL
7. AVERAGE PROFIT METHOD
FUTURE MAINTAINABLE PROFIT IS CALCULATED ON
THE BASIS OF AVERAGE PROFIT OF THE FEW PAST
YEAR .
TWO METHODS COMES UNDER IT
SIMPLE AVERAGE
PROFIT
SAP = AVERAGE PROFIT
OF GIVEN YEAR / NO OF
YEARS
WEIGHTED AVERAGE
METHOD = SUM OF THE
PRODUCT OF THE
PROFIT OF A YEAR
WITH RESPECTIVE
WEIGHT / TOTAL NO OF
WEIGHT
GOODWILL= AVERAGE PROFIT * NO OF YEARS
10. Capital Employed(ASSET BASIS)
STEP PARTICULARS AMOUNT
1 Assets(Fixed + current)
Less: External Liabilities
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2 Net Tangible Assets
Less: Non-Trading assets
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3 Trading capital Employed
Less:1/2 of net profit Earned
during year
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4 Average Capital Employed
during year
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11. steps particulars amount
1 Share capital (equity + preference)
Add : Reserve and Surplus
Capital reserve(gain on
revaluation of net asset
Less: profit & Loss a/c(Dr) balance, if
any
Misc Exp Not w/o, if any
Loss on revaluation , if any
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2 Net Assets
Less: Goodwill(if appearing in
balance sheet
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3 Tangible Capital Employed
Less: Non trading Assets
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4 Trading Capital Employed
Less:1/2 of profit earned during the
year
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5 Average Capital Employed ***
Capital Employed (Liability basis)
